Which statement best describes the private market outcome when there is a positive externality in consumption?

Which statement best describes the private market outcome when there is a positive externality in consumption?

• A. The private market produces less than the socially optimal quantity
• B. The private market produces more than the socially optimal quantity
• C. The private market produces exactly the socially optimal quantity
• D. The private market cannot determine the quantity

Answer: (A)

A positive externality in consumption occurs when consuming a good provides additional benefits to others beyond the private benefit to the consumer. Because individuals only consider their private benefit, the marginal benefit they use to decide how much to consume is smaller than the total social marginal benefit. The market clears where private marginal benefit equals private cost, but the socially optimal quantity is where social marginal benefit equals cost. Since social marginal benefit exceeds private marginal benefit at every quantity, the quantity that satisfies the social condition is higher than what the private market chooses. Thus the private market produces less than the socially optimal quantity. A familiar example is vaccination: getting vaccinated helps others too, so society would benefit from more vaccination than individuals consider, explaining why subsidies or public provision can help reach the social optimum.

A positive externality in consumption occurs when consuming a good provides additional benefits to others beyond the private benefit to the consumer. Because individuals only consider their private benefit, the marginal benefit they use to decide how much to consume is smaller than the total social marginal benefit. The market clears where private marginal benefit equals private cost, but the socially optimal quantity is where social marginal benefit equals cost. Since social marginal benefit exceeds private marginal benefit at every quantity, the quantity that satisfies the social condition is higher than what the private market chooses. Thus the private market produces less than the socially optimal quantity. A familiar example is vaccination: getting vaccinated helps others too, so society would benefit from more vaccination than individuals consider, explaining why subsidies or public provision can help reach the social optimum.